Tokenization — The Next Killer Application on the Blockchain

Security Tokens: The Future of Investing

One revolutionary application that has increasingly emerged in connection with the blockchain is tokenization. This is a digital securitization of a real object, which allows it to be broken down into small shares and converted into individual tokens.
It is best to explain the concept of tokenization with a simple example for better understanding:

Tokenization of Real Estate

Let’s say you’d like to invest a modest amount of money in real estate each year — let’s say 2000€. While this idea may sound reasonable in theory, it is difficult to do in practice. Buying a whole property with 2000€ is simply not possible on the basis of the current market prices as well as the option to buy single square meters. The situation is exactly the same the other way around.
A real estate owner who needs 10,000€ of liquidity in the short term and owns a property worth 100,000€ cannot yet decide to sell a fraction of the asset. There are still strong limits to such transactions to date.

The Principle of Tokenization — There Are Other Ways Too

The real estate owner from our example could decide to convert his ownership rights to the real estate into 100,000 tokens. The number can be chosen arbitrarily. In this example, a single token represents a share of 0.001% in the property. Subsequently, these tokens are issued on a blockchain platform that supports smart contracts and traded on trading platforms.

So what did we do in this (still) fictional example? We tokenized a real asset, making it more liquid. All processes have been simplified. Through the process of tokenization, therefore, even small investors with small investments can participate in all kinds of real goods. It doesn’t matter whether this is a property, a painting, a vineyard or even a soccer player. Already today, there are numerous examples of tokenized assets in a wide variety of areas such as:

• Real estate
• Commodities
• Gold
• Art
• Luxury goods
• Currencies

First Drafts of The Legal Basis For Tokenization

A common problem in the blockchain world, which tokenization also has, is the lack of legalities. One has had great difficulty in the legal treatment of an asset token described above. Is it a share, a certificate, a (crypto)currency or something else entirely?
Liechtenstein has come up with a concept on the legal structure here and has definitely taken the lead with its token container model. The idea is this:

Token Container Model

The Token Container Model (TCM)

Suppose you have an asset of any type that you want to tokenize. The Token Container Model (TCM) puts all the relevant aspects into a container and uses the token to define the rights to the assets (securities, cryptos, real estate, licensing rights, and more) for transactions, trading, ownership, and custody.

Anyone familiar with cryptography knows that it is incredibly difficult to prove ownership or even loss on the blockchain. The reason for this is that there is only one piece of evidence: the private key. If you lose or forget it, you can claim this in court, but no one can prove that you don’t know the private key. And this is where the difficulty arises.

If, for example, you own the title to a property in the form of a token, you also have the right to dispose of it. But since it is technically so difficult to own a token, it has been stipulated that only the control of the token is necessary for proof of ownership. This piece of legislation is very innovative and will serve as a guideline for other countries in the future, laying the groundwork for a token economy.

The Advantages Are Obvious — Summary

• Tokenization increases the liquidity of physical assets.
• The group of potential investors can be increased due to the possibility of splitting. New opportunities open up especially for people who want to invest smaller amounts in real estate.
• Tokenization increases portfolio diversification: in addition to real estate, paintings, vintage cars, and luxury watches can also be included in the investment mix.

Market Size of Tokenized Assets

Experts predict that the market size of tokenized assets (in the EU only) will grow to €1.44 trillion by 2024. So, if you extrapolate this globally to the whole world, you can imagine where the journey will go.
So keep a close eye on blockchain companies that are building infrastructure for trading such asset tokens — because the demand will grow strongly in the future!